Posted: March 29th, 2016

How does this policy affect the quantity supplied, quantity demanded, and the equilibrium price of rice in Indonesia?

Read attachment 3. Assume that the market for rice is perfectly competitive.  a) Suppose, as mentioned in the article, the Indonesian government uses import tariffs to protect domestic production. It imposes a tariff on each unit of rice imported into the country. How does this policy affect the quantity supplied, quantity demanded, and the equilibrium price of rice in Indonesia? In what sense do import tariffs protect domestic production? Explain using the demand/supply model with international trade. Illustrate your answer using diagrams. (3 marks) b) The article also talks about the use of subsidies by governments to protect domestic production. Suppose the Indonesian government uses production subsidies instead of import tariffs to protect local production. Specifically, assume that the amount of the production subsidy is equal to the amount of the import tariff. (For example, the government uses a production subsidy of $2 per unit of rice produced, instead of an import tariff of $2 per unit of rice imported.) Which policy approach would the domestic producers prefer? What about the consumers? What is the impact of the government intervention on overall welfare? Explain using the demand/supply model with international trade